Environmental, social, and governance investing can have a lot of
benefits, but higher returns is not one of them, according to
AQR Capital Management founder Cliff Asness.

In his latest blog post, Asness says those who promote
so-called negative screening  avoiding or divesting
bad stock holdings  as a means to make more
money over time are mostly wrong and actually
at odds with the very point of ESG investing.

ESG investors should view smaller gains as the way to bring
about the change theyre seeking in the world, according
to Asness. Blacklisting sin stocks by definition
does not help performance. If removing such shares from a
portfolio does help, he says, theyre not constraints as
its the action that would be taken anyway for the sake of
higher returns.

Pursuing virtue should hurt expected returns, he
wrote in the blog. Accepting a lower expected return is
not just an unfortunate ancillary consequence to ESG investing,
its precisely the point.

As Asness explains, constraints are needed to push investors
to do things they otherwise wouldnt out of
self-interest.

By default, he said, an ESG investor who screens out certain
assets is going to earn less, and the slimy sin
investor is going to earn more, than either would in the
absence of the ESG investors portfolio constraints. But
this is exactly how the ESG investor makes an impact, according
to Asness.

If the virtuous decide they wont own something,
the sinners then have to, and they have to be induced to
through getting a higher expected return than otherwise,
he said. This in turn is achieved through a lower than
otherwise price.

This hurts the sinful company, which will have
to use a higher discount rate  or cost of capital 
in new investment projects in order to deliver that higher
expected return. Sinful projects become less
profitable, and fewer are undertaken  the exact outcome
desired by ESG investors, according to the blog.

This might be a painful reality to swallow for the
virtuous, Asness wrote. To get precisely what they
want, which is less of the bad stuff occurring, they have to
pay the sinful investors in the form of a higher expected
return.

While all of this sucks, investors hoping to
make a positive impact will simply have to embrace the
suck, according to Asness.

Thats because without it there is no effect on
the world, no good deed done at all, he said.
Perhaps this necessary sacrifice is why its called
virtue.